FDI policy 2015 falls short of expectations

The Department of Industrial Policy and Promotion (DIPP), Government of India, released the new consolidated FDI Policy on May 12, 2015. The document is an annual phenomenon, which, as the name suggests, consolidates the developments as far as the legal regime governing inbound foreign investments is concerned. The release of the FDI Policy 2015 also almost coincided with one year of the Modi government. If one compares FDI Policy 2015 with the FDI Policy 2014, one can clearly observe that the mantra for the year has been 'liberalisation', be it the railways; or the pension sector; or the insurance sector. However, it appears that the FDI Policy, 2015 falls slightly short of the expectations on a few accounts.

Earlier this year, in an effort to simplify the foreign direct investment regime, the DIPP had moved a note to the Cabinet to do away with the distinction between different types of foreign investments through a composite cap on foreign investments.

However, this concept has still not been incorporated into the FDI Policy, 2015, except in defence. It would not be incorrect to say that this inclusion would have brought the much-needed clarity, and was almost expected, as the DIPP had already briefed the cabinet about the proposed change.

Further, in April, the government had de-reserved the last 20 items that had been kept aside for exclusive production by micro and small enterprises. This paved way for large-scale production of these items as the restrictions on investment in plant and machinery would no longer apply. For the uninitiated, an enterprise is classified as 'micro' or 'small', on the basis of investment in plant and machinery. The FDI Policy 2015 still provides that any industrial undertaking which is not a micro or small scale enterprise, but manufactures items reserved for these sectors, would require government route where foreign investment is more than 24 per cent in the capital.

Considering that there are no items that are still reserved for the exclusive production by the micro and small enterprises, the restriction in the FDI Policy 2015 seems more like an oversight and technically, could have been removed.

Apart from the above, there are significant departures from some of the critical developments that the Reserve Bank of India (RBI) had brought about last year. One such critical change is the issuance of partly-paid up shares and warrants by Indian companies to non-residents. By a notification of June last year, the RBI had notified the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Ninth Amendment) Regulations, 2014 which included 'partly paid shares' and 'warrants' within the ambit of the eligible instruments for FDI.

Instructions to this effect were issued by the RBI to the Authorised Dealer Banks, pursuant to another circular a month later, which clearly provided that partly-paid equity shares and warrants issued by an Indian company in accordance with the provision of the Companies Act, 2013 and the SEBI guidelines, as applicable, will be eligible instruments for the purpose of FDI, and foreign portfolio investment (FPI) by Foreign Institutional Investors (FIIs), registered Foreign Portfolio Investors(RFPIs). Just like any other instruments, partly paid-up shares and warrants had certain compliance and reporting requirements.

In what seems to be a typical case of two institutions not working in tandem, the FDI Policy, 2015 defines 'capital' as equity shares, fully, compulsorily and mandatorily convertible preference shares and fully, compulsorily and mandatorily convertible debentures.

There is a note below the definition which states that warrants and partly paid-up shares can be issued to person/(s) resident outside India only after approval through the Government route(FIPB) and that review of FDI policy to include warrants and partly-paid shares is under consideration of the Government. This is clearly a departure from the position of the RBI taken last year- where such instruments were being permitted. Further, taking an approach of obtaining an FIPB approval for issuance of partly paid-up shares or warrants will certainly not add any confidence to structuring of in-bound investments.  

In a recently published column in a business newspaper, I and a colleague had commented on how it is important to have a legal regime which is certain and predictable, if not investor-friendly. The consolidated FDI Policy, 2015 shows that as far as the economic and financial institutions of the country are concerned, the left hand doesn't know what the right hand is doing.

The author is a Partner with J. Sagar Associates, Advocates and Solicitors. Shantanu Jindel, Senior Associate, also contributed to the article.